Where Republican legislation in 2017 restructured how the U.S. taxed corporations at home and abroad, the new bill largely keeps existing rules but raises tax rates.
When Republicans made sweeping changes to corporate taxes in their 2017 tax overhaul, executives and tax professionals worried that a Democratic Congress could roll back the legislation’s rate cuts without reinstating the many tax breaks the law tightened or eliminated.
Based on this week’s congressional tax proposal, it looks as if they were right.
The proposal from House Democrats, released Monday and wending its way through the chamber’s legislative process, would retain much of the corporate tax structure created four years ago while also raising taxes on a range of companies doing business in the U.S. and American corporations operating abroad.
“The House proposal is very much about increases in rates and less about comprehensive new tax policy,” said Todd Simmens, national managing partner of tax risk management at tax and accounting advisory firm BDO. It “essentially modifies changes enacted in the Tax Cuts and Jobs Act, rather than hitting the reset button,” he added, using a name commonly applied to the 2017 legislation.
The net effect: Corporate taxes would rise—by about $1 trillion over 10 years, a congressional committee estimated. That is more than a 25% increase in projected corporate tax revenues, though some of it would be offset for companies that take advantage of renewable-energy tax breaks that the Democrats want to expand or create.
Supporters argue that the provisions reverse a portion of tax cuts that were too generous in the first place.
“It makes fundamental sense that these large, profitable corporations should help pay for the very infrastructure that makes their laudable success possible,” said Richard Neal (D., Mass.), who heads the House Ways and Means Committee and who drafted the proposal.
For corporations, the 2017 tax law cut the income-tax rate to 21% from as high as 35%. At the same time, it eliminated a range of tax breaks and deductions, an approach sometimes referred to as “broadening the base” because it meant the headline tax rate would be applied to a bigger share of corporate income, making up for some of the rate reduction.
“It’s a lot like 2017 model 2.0,” said Eric Solomon, a partner at law firm Steptoe & Johnson who was assistant Treasury secretary for tax policy from 2006 to 2009. “In some ways, these provisions are turning the dials in the TCJA—you’re really going to have to study it hard and do modeling.”
Among other changes, that 2017 law ended or reduced deductions for domestic manufacturers and the makers of “orphan” medicines for rare conditions, limited deductions for interest paid on debt and employee fringe benefits, made it harder to deduct operating losses and ended tax breaks for like-kind exchanges outside real estate.
The House proposal is the latest from Democrats in Washington, following one from President Biden and another from a cross-section of Senate Democrats last spring. It is by no means a done deal. Rep. Neal’s committee advanced the plan on a 24-19 vote Wednesday, with one Democrat opposing it. In the full House, progressive Democrats would prefer a bolder bill and some moderates are wary of raising taxes too much. Once a bill comes to the House floor, the party has little room for defectors—and even less in the evenly split Senate.
Business trade associations, including the U.S. Chamber of Commerce and the Business Roundtable, have blasted the proposal for raising taxes generally, and some executives have warned that it will crimp business investment and jobs.
“If you pay out more in taxes, you’re going to pay out less elsewhere, whether that’s investment in jobs, wages or R&D facilities,” Brian Swartz, chief financial officer of Genesys Telecommunications Laboratories Inc., a closely held Daly City, Calif., company, said Monday.
Others said they are reserving judgment while the Democratic-led legislation takes shape.
“It’s a roulette wheel,” Glenn Boehnlein, CFO of medical-device company Stryker Corp., told investors at a conference presentation on Monday. “Everybody is proposing a different number so far.…Right now, we’re more in a wait-and-see mode than necessarily reacting to what we’re hearing.”
The House plan comes in as less far-reaching than the president’s on the corporate front. It would raise the corporate rate to 26.5%, higher than the 25% favored by some Senate Democrats but below Mr. Biden’s 28% proposal. It would raise the U.S. global minimum tax, but by less than Mr. Biden proposed.
It doesn’t include an administration plan that would sharply raise taxes on companies headquartered in low-tax countries and operating in the U.S., or a new minimum corporate tax for large companies based on financial-statement income. It does include some elements from the Biden proposal, including country-by-country assessment of the same global minimum tax, instead of the current aggregate assessment.
A tax increase of some magnitude is to be expected with Democrats holding the White House and majorities in both houses of Congress, said one tax executive for a major U.S. industrial company. The bigger question is how much other elements of the corporate tax code change, he added.
“This bill I would characterize as better than the Biden administration release,” the executive said. “Some of the things we had been very concerned about weren’t in it.”
Some provisions in the House proposal would serve to lower corporate tax costs. One would stave off a scheduled tax increase on research and development in the U.S. Another would let American companies claim more benefit for some of the taxes they pay to foreign governments.
For the smallest or least profitable firms—those reporting annual profits of $400,000 or less to the Internal Revenue Service—the U.S. income-tax rate would fall to 18% under the House proposal. Companies making up to $5 million a year would top out at the current rate of 21%. Most of corporate tax revenue, however, comes from large companies. Most small businesses are structured so they don’t pay the corporate tax at all and pay taxes through their owners’ individual returns.
Perhaps most significantly for multinational businesses, the House proposal would largely keep existing rules for taxing the foreign profits of U.S. companies. It would raise the rate applied to profits earned in low-tax jurisdictions but keep it lower than the U.S. rate. The amount of income that can be shielded from the tax based on tangible assets would also shrink.
President Biden’s proposal would replace a 2017 deduction meant to reward profits on exports—called foreign-derived intangible income, or FDII—with different incentives. By contrast, the House bill keeps the existing structure but reduces the benefit.
“This House proposal is tweaking those provisions that came out of the 2017 tax reform, not another full-scale overhaul,” said Monika Loving, international tax services national practice leader for BDO.
A key factor that corporate tax professionals are watching: the gap between the domestic tax rate and the lower U.S. tax on global income. The wider the gap, the greater the incentive to move production overseas—but as the gap narrows, U.S. companies become less competitive in foreign markets, Mr. Solomon of Steptoe & Johnson said.
However, if other countries follow the U.S. lead and also adopt global minimum tax rates of similar size—something the Biden administration is encouraging—the disadvantage could be minimized, Mr. Solomon said.
Although the Democratic proposals generally raise the domestic rate, they also raise the cost of generating profits in low-tax jurisdictions, said Chye-Ching Huang, executive director of the Tax Law Center at New York University. “The direction these proposals are going is to reduce the gap.”
Taken together, the tax proposal’s many moving parts could wind up widening the gap, the Financial Accountability and Corporate Transparency Coalition, a Washington-based group critical of corporate tax avoidance, says. For example, a provision in the House proposal would give companies more credit for the foreign taxes they pay, offsetting a portion of the global minimum tax.
But the same complexity means companies must carefully model tax decisions rather than work from the rates themselves, the industrial-company tax executive said. “What gets subject to tax has very little to do with the intent of the provision and very much to do with the intricacies,” he said.